Onions are, once again, in the news. Last week, retail prices touched Rs 50/kg in several markets, and wholesale prices touched Rs 30/kg in major onion markets like Lasalgaon in Maharashtra. This is not the first time that onion prices have spiked. Almost every alternate year, this roller-coaster of boom and bust in onion prices happens (see Graph). But 2017 is interesting as it saw record low prices in May-June when farmers sold onions at around Rs 2/kg in several mandis in Madhya Pradesh. This has led to grief and anger among farmers.

The situation became precarious when farmers protested and police fired at them, resulting in some unfortunate deaths. The MP chief minister realised the sensitivity of the incident and quickly announced a decision to procure onions at Rs 800/quintal and state agencies procured 8.76 lakh tonnes. But in the absence of ample storage capacity in the state, onions had to be quickly disposed of through the PDS and open market operations at almost one-fifth the cost. The whole operation caused a loss of Rs 785 crore to the MP government.

However, the more unusual aspect of the onion situation was that only a few months later, in August 2017, prices started shooting up (see Graph) resulting in a visit by officers of the Union Ministry of Consumer Affairs to Lasalgaon, income tax raids on traders in September and the suspension of trading in Lasalgaon APMC for about a month. The prices then fell for some time but they have been rising since Diwali, prompting the government to announce the import of onions by the MMTC to bring down domestic prices.

This is not the first year when government action has been so ad-hoc and puzzling within a few months. In previous years, too, we have seen the government fix the minimum export price, ban exports of onions, and even a study by the Competition Commission of India. The lesson: Income tax raids proved futile in keeping the lid on onion prices even for a few months. We need better policies.

So, what is it that causes high volatility in onion prices and what could be the way out? In order to respond to these questions, one may first note that India produced 21.7 MMT of onions, which is about 20 per cent of global production in 2016-17, second only to China. India also exported 2.4 MMT in 2016-17, up from 1.2 MMT in 2014-15. About 60 per cent of onion production is in the rabi season, sown in December-January and harvested in April-May. This is the onion which is stored by farmers and traders and it meets export as well as domestic demand till the arrival of the kharif onion crop, which is sown in May-June and harvested in October-November. The late kharif crop is sown in August-September and harvested in January-February. Kharif and late kharif crops produce about 20 per cent each of the annual production. Kharif onion is of rather poor quality and cannot be stored for very long. The prices tend to rise in October-November when rabi onion stocks are almost depleted and kharif onion is yet to hit the market, or if the kharif crop is damaged, as is the case this year.

One of the prime reasons behind high volatility in onion prices stems from a lack of storage facilities that have not kept pace with rising production. Also, the traditional storage practices incur losses as high as 40 per cent. While Maharashtra used the Rashtriya Krishi Vikas Yojana and National Horticulture Mission and created 42,282 low-cost onion storage structures with a capacity of 9.65 lakh tonnes, there is hardly any storage facility in MP. No wonder, MP farmers suffered most in a bumper onion crop year. However, modern cold storages, as being set up by Allround India, a subsidiary of Allround Holland, and other such companies, can bring down wastage within the 10-15 per cent range.

So, the first policy action has to be to promote modern cold storages and develop a system akin to that of the warehouse receipt system for farmers. While a bulk of the storage has to be undertaken by the private sector, the state can do some stocking under a price stabilisation fund. They can hire the services of specialised private sector agencies to carry out such operations on the government’s behalf.

Second, use trade policy for price stabilisation. In case of a bumper crop, promote exports and in case of a deficit crop, encourage imports. This has to be done well in advance — as soon as one comes to know the advance estimates of production.

Third, encourage the setting up of onion dehydrating units and promote demand for dehydrated onions amongst large consumers (restaurants, fast food chains, army, hospitals, etc). Gujarat has already emerged as the main centre for dehydration units with 85 out of 100 units located there, while Maharashtra has just five units. Dehydrated onions are being exported to Japan, Europe, Russia, US and some African countries. The Ministry of Food Processing and state governments can encourage entrepreneurs to avail grants for setting up onion dehydration and processing units. A subsidy of up to 35 per cent with a cap of Rs 5 crore is available to such units. However, the budget of the Ministry of Food Processing for this scheme is just Rs 95 crore. And MP, in its budget for 2017-18, has provided just Rs 7 crore as grants to food processing units. This needs to go up manifold if we are serious about encouraging food processing and stabilising prices even of fresh onions.

Thus, instead of raiding traders or banning exports et al, the Centre and the states would do better if they promote investment in scientific storage and processing facilities, and use trade policy more judiciously.